Lord Turnbull: My Lords, the principle of financial privilege means that this House has no powers in relation to the structure of tax, its rates and its incidence. It can, however, examine the way in which the tax system is administered, its governance and the compliance burden on different types of taxpayers. This time last year the Economic Affairs Committee, of which I am a member, through its Finance Bill sub-committee, looked into the plans to roll out Making Tax Digital. We found that, while HMRC might have been ready, a lack of communication and testing meant that many taxpayers would not be, especially to meet the requirement to submit returns quarterly. We recommended that the plans be reduced in scope and taken more slowly. To their credit, the Government took our advice and confined the first phase only to VAT and only to businesses with a turnover greater than £85,000. It was promised that there would be no further changes before 2020.
In my view, we helped to avoid a train wreck that would have damaged relations between HMRC and small traders and unincorporated businesses. It might have been nice if Treasury Ministers had said: “Do you know what? You did us a good turn there”. What remains is the undertaking not to extend the scheme before 2020. This is now only about 13 months away—not much time to digest the lessons of progress to date and to get taxpayers and software suppliers ready. The danger is that in next month’s Budget there will be an announcement simply reintroducing in their original form the proposals that were delayed. Instead, the EAC recommended delay until 2022 and the publication of a long-term plan setting out the next phases of this important initiative.
HMRC needs to look again at whether all the information it is seeking—not just total revenue and total spending but the invoices behind them—is really needed and needs to be submitted quarterly, even by very small businesses. The original turnover threshold was £10,000—less than the personal allowance—which, in my view, made no sense whatever. The estimate of costs to the taxpayer provided in the original plans carried no conviction and was strongly criticised by many witnesses to our inquiry. We are still waiting for those costings to be updated.
Two areas in the Finance Bill now before us raise issues about HMRC powers. As well as looking at them specifically, the committee decided to look at the  balance of powers more generally, and in particular at whether the balance between clamping down on avoidance and treating taxpayers fairly remained appropriate. Many concerns have been raised, particularly by individual, unrepresented taxpayers. HMRC has been tasked by Ministers and Parliament with collecting more of the revenue that is due. The committee endorses this, although many people are struck by the contrast between a tougher approach for individuals and the more leisurely pace of progress on the taxation of the giants of the digital world.
If HMRC is to be equipped with greater powers and to take a more robust approach, it should logically follow that governance and safeguards should keep pace. In fact, we found the opposite. Paragraph 14 of the EAC’s report observes that the 2016 changes to the charter under which HMRC operates,
“increased taxpayers’ obligations and reduced HMRC’s”.
For example, accelerated payment notices and follower notices have no right of appeal to a tribunal. The committee observed:
“Whenever a new power is introduced or an existing power significantly extended it should be accompanied by a right of appeal against the exercise of the power, not just against the underlying tax liability … Where taxpayers wish to challenge the lawfulness of HMRC’s decisions and there is no right of appeal … they may do so only”,
through the High Court in judicial review, which makes proceedings much more expensive. The committee recommended legislation to give the First-tier Tribunal for tax the power to conduct judicial reviews.
The first extension of powers in the current Bill is to require records to be held for up to 12 years where offshore issues are involved. The justification for this large extension is weak and poorly targeted. Drawn into its scope may be compliant taxpayers with small pensions from time spent working abroad or with overseas properties. The committee considered this proposal to be unreasonably onerous and disproportionate to the risk.
The most contentious issue raised with the committee was the loan charge: a proposal to claw back tax lost from deferred remuneration schemes. I should make clear that the EAC supports the efforts to drive out artificial deferred remuneration schemes. We rejected the arguments put forward to us that, so long as each step in a scheme was legal, no tax would be payable. This means that we accept HMRC’s argument that, where a series of transactions is contrived and artificial and has no purpose other than to produce a tax advantage, it should not be regarded as effective in reducing tax.
Taking action to bring deferred remuneration schemes to an end from now on is entirely right. The issue is about how much back tax should be reclaimed. Many taxpayers feel that reclaiming unpaid tax from any past years is retrospective in effect. Mr Mel Stride, the Financial Secretary to the Treasury, vigorously denies that there is retrospection. He argues that tax was always due and still is, and that, using the great mantra of the day, “nothing has changed”. The tax payable is simply being collected.
There are two problems with this argument. First, if the tax was payable, why did HMRC make no effort  to collect it at the time? There are many cases where  taxpayers informed HMRC that they were in deferred remuneration schemes, and cases where HMRC raised no queries and closed the return for the year. I am no lawyer, but I understand that there is a principle in law called estoppel, where a person is precluded from asserting facts or rights that are contrary to their previous actions. Perhaps that should apply to HMRC, which had opportunities to require tax to be paid but failed to act on them.
The second problem is that HMRC’s approach fails to take account of the circumstances in which many taxpayers found themselves in deferred remuneration schemes. They were not affluent, well-advised celebrities who should have known better, but staff whose employers, some even in the public sector, transferred them to different employment contracts that required them to enter into loan schemes. There is resentment that HMRC seems to be targeting individual taxpayers rather than the employers and promoters of such schemes.
The loan charge was approved by Parliament—the other place—in 2016: another example of legislating in haste with inadequate thought to the consequences. The realisation that all is not right has now dawned on the other place, which is evidenced by the amendment to this Bill on Report by Sir Edward Davey requiring the Government to report back by 30 March on the effects of the loan charge scheme. I hope that the Government will use the opportunity created by the amendment to take up the EAC’s recommendation to exclude from the charge loans in years when a taxpayer disclosed their participation in a scheme to HMRC, and for years that otherwise would have been closed. To reduce the likelihood of retrospection, the committee recommended that HMRC should make a clear public statement as soon as it begins an investigation into a potential tax avoidance scheme.
I will end on a more positive note. The final recommendation of the EAC’s report, accepted by the Government, was that there should be a new powers review, so I hope we can restore a better balance between HMRC and the taxpayer and provide a better system of oversight and accountability in how HMRC uses its powers.